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84–882PS 2003

VA RESEARCH AND NONPROFIT VA RESEARCH

CORPORATIONS AND EDUCATION FOUNDATIONS

HEARING

BEFORE THE

SUBCOMMITTEE OVERSIGHT AND INVESTIGATIONS

OF THE

COMMITTEE ON VETERANS’ AFFAIRS

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

SEPTEMBER 19, 2002

Printed for the use of the Committee on Veterans’ Affairs

Serial No. 107–40

(
COMMITTEE ON VETERANS’ AFFAIRS

CHRISTOPHER H. SMITH, New Jersey, Chairman

BOB STUMP, Arizona

MICHAEL BILIRAKIS, Florida

TERRY EVERETT, Alabama

STEPHEN E. BUYER, Indiana

JACK QUINN, New York

CLIFF STEARNS, Florida

JERRY MORAN, Kansas

HOWARD P. (BUCK) MCKEON, California

JIM GIBBONS, Nevada

MICHAEL K. SIMPSON, Idaho

RICHARD H. BAKER, Louisiana

ROB SIMMONS, Connecticut

ANDER CRENSHAW, Florida

HENRY E. BROWN, JR., South Carolina

LANE EVANS, Illinois

BOB FILNER, California

LUIS V. GUTIERREZ, Illinois

CORRINE BROWN, Florida

JULIA CARSON, Indiana

SILVESTRE REYES, Texas

VIC SNYDER, Arkansas

CIRO D. RODRIGUEZ, Texas

RONNIE SHOWS, Mississippi

SHELLEY BERKLEY, Nevada

BARON P. HILL, Indiana

TOM UDALL, New Mexico

PATRICK E. RYAN, Chief Counsel and Staff Director

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

STEPHEN E. BUYER, Indiana, Chairman

BOB STUMP, Arizona

MICHAEL BILIRAKIS, Florida

TERRY EVERETT, Alabama

JULIA CARSON, Indiana

BARON P. HILL, Indiana

TOM UDALL, New Mexico

(II)
(III)

C O N T E N T S

September 19, 2002

Page

VA Research and Nonprofit VA Research Corporations and Education

Foundations .......................................................................................................... 1

OPENING STATEMENTS

Chairman Buyer ...................................................................................................... 1

Hon. Tom Udall ....................................................................................................... 2

Hon. Julia Carson, prepared statement of ............................................................ 29

WITNESSES

Bascetta, Cynthia A., Director, Veterans’ Health and Benefits Issues, General

Accounting Office, accompanied by Michael T. Blair, Jr., Assistant Director

of Health Care, General Accounting Office ........................................................ 19

Prepared statement of Ms. Bascetta ............................................................... 50

Kirschenman, Jr., Henry G., CPA; John A. Bradley, Director of Finance,

Office of Research and Development, Veterans Health Administration, Department of Veterans Affairs; and Wendy Baldwin, M.D., Deputy Director

for Extramural Research, National Institutes of Health .................................. 23

Prepared statement of Mr. Kirschenman ....................................................... 84

Laracuente, Antonio, Executive Director, Atlanta Research and Education

Foundation (AREF) and Chairman, National Association of Veterans’ Research and Education Foundations (NAVREF) ................................................. 22

Prepared statement of Mr. Laracuente, with attachment ............................ 64

Roswell, Hon. Robert H., Under Secretary for Health, Department of Veterans

Affairs, accompanied by: James Burris, M.D., Acting Chief Research and

Development Officer, Veterans Health Administration, Department of Veterans Affairs; Mindy Aisen, M.D., Director of Rehabilitation Research and

Development, Veterans Health Administration, Department of Veterans Affairs; and John H. Mather, M.D., Chief Officer, Office of Research Compliance and Assurance, Department of Veterans Affairs ...................................... 8

Prepared statement Dr. Roswell ..................................................................... 40

Slachta, Jr., Michael, Assistant Inspector General for Auditing, Office of

Inspector General, Department of Veterans Affairs, accompanied by John

Bilobran, Deputy Assistant Inspector General for Auditing, Office of Inspector General, Department of Veterans Affairs .................................................... 17

Prepared statement of Mr. Slachta ................................................................. 47

Wu, Hon. Benjamin H., Deputy Under Secretary for Technology, Technology

Administration, Department of Commerce ........................................................ 4

Prepared statement of Mr. Wu ........................................................................ 30

MATERIAL SUBMITTED FOR THE RECORD

Written committee questions and their responses:

Chairman Buyer and Congresswoman Carson to Dr. Robert Roswell,

Under Secretary for Health ......................................................................... 93

Chairman Buyer to Richard J. Griffin, Inspector General ........................... 98

Chairman Buyer and Congresswoman Carson to Ms. Cynthia Bascetta .... 102

Chairman Buyer and Congresswoman Carson to Mr. Henry Kirschenman .... 106

Chairman Buyer and Congresswoman Carson to National Association

of Veterans’ Research and Education Foundations (NAVREF) ................ 109

(1)

VA RESEARCH AND NONPROFIT VA RESEARCH CORPORATIONS AND EDUCATION

FOUNDATIONS

THURSDAY, SEPTEMBER 19, 2002

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS,

COMMITTEE ON VETERANS’ AFFAIRS,

Washington, DC

The subcommittee met, pursuant to notice, at 11:05 a.m., in room

334, Cannon House Office Building, Hon. Steve Buyer (chairman of

the subcommittee) presiding.

Present: Representatives Buyer, Boozman, and Udall.

OPENING STATEMENT OF CHAIRMAN BUYER

Mr. BUYER. The Subcommittee on Oversight and Investigations

of the Committee on Veterans’ Affairs will come to order.

This is a hearing on VA research dated September 19, 2002.

Good morning.

Earlier this year, we held a joint hearing with the Health Subcommittee that revisited our 1999 hearing on the suspension of

human subject medical research at the Greater L.A. VA medical facility, and also looked at the accountability of the VA research

corporations.

Nothing is more important to the members of this committee

than to ensure that our Nation’s most vulnerable veterans are protected and not in any way abused by the very system whose mission is to safeguard their well-being.

It’s important to know that the research violations uncovered at

Los Angeles in 1999 have been fully addressed and corrected. We

intend to make sure that such flagrant disregard of the laws and

regulations governing ‘‘informed consent’’ never occurs again within

the VA system.

I understand that Dr. Roswell, the Under Secretary for health,

has requested that the Office of Research Compliance and Assurance provide him with an assessment of VA’s human subject research protection accreditation program and the progress being

made by the National Committee for Quality Assurance.

We welcome Dr. Mather, here to give us an update on his activities, and will await receipt of his final report before pursuing this

issue in greater depth.

This morning’s hearing will specifically address two areas of ongoing concern, which include the transfer of the intellectual property rights stemming from VA inventions and discoveries and the
2

need to strengthen reporting and accountability standards of the

VA’s 85 research and education foundations.

Today, we will hear from the VA about the establishment of its

Technology Transfer Office. The Department of Commerce is here,

as well, to comment on VA’s efforts and to illustrate how they fit

into the larger efforts of the Federal Government as a whole.

One question is, why hasn’t the VA capitalized on its many discoveries by initiating its rightful share of patent ownerships? This

is a question that I brought up at the last hearing and I look forward to exploring here today.

We need some answers, because the potential loss to the VA

could be hundreds of millions of dollars in royalties, a figure that

we tried to guesstimate, but hopefully you have something a little

more concrete for us here today, not to mention the many millions

of dollars in lost revenue that has already been experienced.

At our last hearing, we were told that the VA has become much

more aggressive in seeking patent rights for its many medical discoveries, and I look forward to the testimony about your progress,

and I thank you in this endeavor.

We also look forward to hearing from GAO and the IG, who will

share their findings on the research corporations from field investigations conducted in Boston, San Francisco, Palo Alto, San Diego,

Portland, Atlanta, and Indianapolis.

The IG will also comment on the revised responses to questions

posed to the VA at the May hearing, which were inadequately answered and were explored even further by Dr. Snyder, of which

still we’re lacking answers.

Finally, we’ll hear from the VA and NIH on the issues of indirect

cost allocation with regards to NIH grant research carried out in

VA facilities.

I look forward to hearing a lot of good ideas and believe this

should be an informative hearing, and I will now yield to Mr. Udall

for any opening statement he would like to make.

OPENING STATEMENT OF HON. TOM UDALL

Mr. UDALL. Thank you very much, Chairman Buyer.

I, too, want to thank all of our panel members and guests for

their attendance at today’s hearing. I personally thank you all, and

I also want to thank you on behalf of our ranking member, Ms.

Julia Carson, who unfortunately had to return to her home town

yesterday because of a family emergency.

I’m sure that we all wish her and her family well, and Mr. Chairman, she asked that her written statement be included in the

record.

Mr. BUYER. With no objection, it will be so entered.

[The statement of Hon. Julia Carson appears on p. 29.]

Mr. UDALL. My focus today will be on the indirect cost rate normally associated with some NIH grants but seemingly absent in

NIH grants to the VA.

In this regard, we have some unfinished business from the last

hearing on this subject held during May of this year. I have reviewed the record and reviewed the research by an independent

contractor.
3

I understand that a meeting between the VA and NIH was promised for determining an appropriate level or level of compensation

for indirect costs. I am interested in the progress in this area.

Mr. Chairman, I support your general focus on research corporation accountability. Government not correctly insists that private

corporations be held accountable. I believe that even quasi-governmental organizations, such as the VA research corporations, must

also be held accountable.

The devil is in the detail, and the question is, to what degree?

What is an appropriate level of accountability and oversight for research corporations?

Human subject research, Mr. Chairman, is clearly a vital issue.

We benefit when this research is successful, but we must guard

against even the possibility of misinformation or reckless research.

This is an issue that must always be a front-burner issue with the

committee.

In the area of intellectual property rights for VA, there is a tremendous breadth and depth of VA research initiatives. Some initiatives have yielded innovations with profound impact on everyday

health care and everyday life.

It is time VA takes the bows for their efforts, and at the same

time, they must secure their intellectual property rights. This is especially important and would serve to buttress portions of the undernourished VA budget.

Again, welcome to all, and I look forward to this hearing, and

yield back, Mr. Chairman.

Mr. BUYER. Thank you. Mr. Boozman.

Mr. BOOZMAN. I’d just like to thank you for calling the meeting,

Mr. Chairman, and really look forward to the panel, and certainly

this is a subject that we need to explore further, and again, I just

appreciate that we’re having the meeting.

Mr. BUYER. Thank you. I call to testify and recognize the first

panel.

It is the Honorable Benjamin Wu, the Deputy Under Secretary

for Technology at the Department of Commerce.

Also testifying on this panel will be the Honorable Robert

Roswell, the Under Secretary for Health of the VA.

I’ll ask my colleagues here, because Secretary Wu is under a

tight time schedule—what I’d prefer to do here is, if you don’t

mind, Dr. Roswell, we take testimony from Mr. Wu, if any of my

colleagues have any specific questions of you, we’ll go ahead and

break and do that real quick, and then we’ll let you go and then

proceed on.

Would that accommodate you?

Mr. WU. Thank you, Mr. Chairman. I appreciate that.

Mr. BUYER. All right. Thank you. You are now recognized for 5

minutes.
4

STATEMENTS OF HON. BENJAMIN H. WU, DEPUTY UNDER SECRETARY FOR TECHNOLOGY, TECHNOLOGY ADMINISTRATION, DEPARTMENT OF COMMERCE; AND HON. ROBERT H.

ROSWELL, UNDER SECRETARY FOR HEALTH, DEPARTMENT

OF VETERANS AFFAIRS, ACCOMPANIED BY: JAMES BURRIS,

M.D., ACTING CHIEF RESEARCH AND DEVELOPMENT OFFICER, VETERANS HEALTH ADMINISTRATION, DEPARTMENT

OF VETERANS AFFAIRS; MINDY AISEN, M.D., DIRECTOR OF

REHABILITATION RESEARCH AND DEVELOPMENT, VETERANS HEALTH ADMINISTRATION, DEPARTMENT OF VETERANS AFFAIRS; AND JOHN H. MATHER, M.D., CHIEF OFFICER,

OFFICE OF RESEARCH COMPLIANCE AND ASSURANCE, DEPARTMENT OF VETERANS AFFAIRS

STATEMENT OF HON. BENJAMIN H. WU

Mr. WU. Thank you. Good morning, Mr. Chairman, Mr. Udall,

Mr. Boozman, and members of the subcommittee.

I appreciate the opportunity to appear before you to discuss the

Federal Government’s initiatives on government research and development and intellectual property rights, especially relating to

transfer of government technology to the private sector for commercialization, which we commonly refer to technology transfer.

I commend you for your leadership on this issue and for holding

this hearing.

The Department of Commerce, through our Technology Administration, has specific roles and responsibilities in the area of technology transfer. As the agency that represents industry, the department serves as the administration’s main focal point for the discussion of technology transfer issues.

The Department of Commerce is pleased to play a significant role

in the federal technology transfers, since it is particularly useful to

get the full benefit for the public of the billions of dollars spent on

research and development by the Federal Government.

By statute, the department coordinates federal technology transfer policies and makes recommendations for its effective implementation.

These coordination responsibilities are done primarily through

the department’s leadership of the Inter-agency Working Group on

Technology Transfer, a group of technology transfer managers from

all federal agencies, including the VA.

The Inter-agency Working Group discusses a wide range of agency initiatives and issues related to technology transfer, recommends policies, and also coordinates submission of congressional

reports.

In our role as a coordinator and leader of the Inter-agency Working Group, we have crafted administration support for a number of

technology transfer-related provisions and legislation, and as the

administration considers ways to improve the efficiency and speed

of the technology transfer efforts, the Inter-agency Working Group

will continue to be a strong asset in organizing consultations with

public and private technology transfer coordinators, identifying recommendations, and also prioritizing appropriate administrative or

regulatory action.
5

The technology transfer authorities have been very useful in the

science and technology enterprise of our Nation’s federal research

programs, including the Department of Veterans Affairs medical

programs.

The VA deserves commendation for its current efforts and its desire to develop an active and a robust technology transfer program.

In February 2000, VA appointed its first director of its technology

transfer program and its first patent attorney last year.

Additionally, VA has entered into an arrangement with the National Technology Transfer Center at Wheeling Jesuit University in

West Virginia, who we work closely with, also, to assist with its

technology transfer program.

These developments, coupled with the April 2001 announcement

by Secretary Principi that the VA should also take the lead in aggressively disseminating new discoveries and inventions made at

the VA medical research facilities, indicate a new and growing

recollection of the importance of technology transfer to the vitality

of the department’s research activities, so it can be expected that

the number of VA inventions, patents, and licenses will substantially increase over time.

This is an obviously positive development, because, as you know

from the previous hearings, the landscape of federal research and

development is changing. Federal Government funding for R&D,

while still very important, is no longer the driver of United States

science and technology investment.

The primary drivers of technology investment now increasingly

reside in the private sector, and also in the universities, and accordingly, there needs to be greater collaboration between government, industry, and universities for research that will ultimately

lead to collaboration, for it is when innovation is commercialized

and put into the marketplace that the American public gets the

greatest gain for its federally funded research through jobs,

through taxes, through royalties, and also in enhanced international competition.

A technology transfer tool, such as cooperative research and development agreements and patent licensing are ways for federally

funded innovations to be developed into commercially useful products and processes, and Congress has been a real leader in these

efforts.

Congress has helped to lead the way, with the passage of the two

most seminal technology transfer laws, in 1980, and that was the

Stevenson-Wydler Innovation Act and also the Bayh-Dole Act.

The manner in which the Federal Government works with the

private sector in developing and distributing technologies changed

in fundamental ways with the passage of these two seminal pieces

of legislation.

Mr. Chairman, in my previous life here in the House, I had the

pleasure of working for Congresswoman Connie Morella from

Maryland, who was a sponsor of the two most recent congressionally enacted technology transfer laws that significantly amended

the laws affecting CRADAs, federal patents, and technology

licensing.

As a result of these technology transfer laws, the government

began to find ways to partner with industry and universities in de-
6

velopment of technologies that both furthered agency missions and

also advanced our Nation’s competitiveness and the overall

strength of our economy, and as a result, federal technology transfer has helped to develop everyday products such as the global positioning system, the HIV home test kit, stronger and lighter materials for fuel-efficient cars, corn that’s more resistant to drought

and disease.

These are just a few of the hundreds of examples of technologies

that the Federal Government originally held intellectual property

to and either licensed out the technology or have collaborated with

industry to commercialize.

Through the years, Congress, based on input solicited from

industry, attempted to improve and then streamline these technology transfer processes, and for effective commercialization of

new innovation or technology, our partners must be given adequate

incentives to bring the products to the marketplace for

commercialization.

To be appropriately incentivized, industry needs to have sufficient intellectual property rights in a procedure that is as streamlined and impediment-free as possible.

In the limited time that I have remaining, let me take, for example, the Bayh-Dole Act, which has been a subject of discussion

within the VA.

The Bayh-Dole Act allows federal agencies to license governmentowned, patented, scientific inventions non-exclusively, partially exclusively, or exclusively, depending on which license is determined

to be the most effective means for achieving commercialization, and

with the success of licensing federal inventions, the Bayh-Dole Act

is widely viewed as an effective framework for federal technology

transfer.

As a matter of fact, the Association of University Managers,

Technology Managers, for fiscal year 2000, indicated that universities earned $1.26 billion in royalties, licenses, introduced at least

347 new commercial products, and 454 new companies were created as a result of this procedure.

The Bayh bill, and all of the technology transfer litigation, has

been very effective and utilized in its review by the Department of

Veterans Affairs, and there are a few issues in which the Interagency Working Group is looking at in conjunction with the VA

and the other agencies relating to employees without compensation, the WOC, the inter-institutional agreements such as the

CTAA, which the VA is looking at, as well as dual employees with

joint appointments.

So we look forward to working closely with the VA and all the

other agencies that make up the Inter-agency Working Group on

these and other issues, because, given the importance and benefits

of technology transfer, we understand, through the department and

within the administration, that the ability of the United States to

compete has been strengthened by new paradigms which are being

created and fostered under these technology transfer laws in bringing together the universities, government, and the industry, all the

three entities that perform research and development in this Nation, and by doing so, we can further our scientific enterprise and

make our Nation stronger.
7

Thank you very much for your time, Mr. Chairman.

[The prepared statement of Mr. Wu appears on p. 30.]

Mr. BUYER. Mr. Wu, I’ve only been here 10 years, but I voted on

a lot of different bills that send a lot of money out there for research, whether it’s from agri-science, food safety, just name it,

even in the health fields and through NIH. I will continue to be

an advocate here for the funding streams to our colleges and universities; I don’t have a problem with that.

What’s starting to bother me are these major universities and

colleges getting this exclusivity with regard to their patent rights

and nothing coming back to the VA. I just told Mr. Udall, I haven’t

seen tuition go down at all.

So what you have are major colleges and universities, they get

all excited, too, and they start building buildings and they start

doing other things, and this is all pushing the bounds and all, but

I want to know this specifically.

What is the Department of Commerce’s position on the VA asserting its intellectual property rights to discoveries that it’s involved with?

Mr. WU. Well, we believe that the federal agencies should assert

their intellectual property rights as they see fit.

However, we need to keep in mind the principles of technology

transfer and the need to bring in collaborative partnerships between the three entities if we’re, in fact, going to have a new paradigm for effective research and development and scientific discovery in this country.

One of the keys, though, for innovation is making sure that the

American public is able to reap the benefits from it, and it can only

do so through commercialization.

Commercialization allows for companies to be created, allows for

jobs to be created, and allows for new innovations and new discoveries to be put onto the marketplace for distribution, and commercialization is really the goal of technology transfer.

If we allow the Federal Government to hold title, and only the

Federal Government, the Federal Government has not had a strong

track record, actually it does very poorly, in commercialization. Essentially, these products will then sit on a shelf

Every day in our Nation’s 700 federal laboratories we have new

innovations, new discoveries being created, and these discoveries

are being done to further the agency mission.

For example, DOE does energy work. DOD labs do defense mission-related work. But in these laboratories, we also see great commercial applications that may be directly resulted or a spinoff, and

for the Federal Government to just hold title to these inventions,

then we’re never going to get these products out into the marketplace.

We have companies who are interested in partnering with federal

laboratories. We have universities who are able to bring in their

breadth of experience, the graduate students who do the work, the

research, and also their background.

Mr. BUYER. Mr. Wu, time out. The Federal Government is not interested here in making a cornerstone on the marketplace.
8

If we’re going to be partnering with major universities and corporations for research to help our veterans, we want that to be out

in the marketplace. Okay?

Mr. Udall, do you have any questions?

Mr. UDALL. I just want to thank Dr. Wu for his testimony, and

I also recognize what a benefit technology transfer is to the private

sector in job growth.

I have a national laboratory, and we try to encourage that technology transfer in New Mexico, and it’s resulted in many companies starting and building the job base around the lab and in the

local community.

So thank you very much for your testimony. I don’t have any

questions, Mr. Chairman.

Mr. BUYER. I just want to thank you for coming today, and I

think the support of the Department of Commerce in the VA’s efforts to enforce its patent rights.

Mr. WU. Certainly, Mr. Chairman. Thank you very much for

looking at this issue and we, as part of the Inter-agency Working

Group, look forward to working with the VA.

They should be commended for recognizing the importance of

technology transfer. There are some issues that we want to work

with the VA to create harmonization on certain of the agreements

and certain policies, but the VA has come out very strong and aggressively, and I think it’s sending a message to those who want

to work with the VA, and we look forward to working with them.

Mr. BUYER. Dr. Roswell, do you have any comments on Mr. Wu’s

testimony?

Dr. ROSWELL. No. I’d just like to thank you for being here, and

we appreciate your testimony.

Mr. WU. Aren’t you nice?

(Laughter.)

Mr. BUYER. Thank you, Dr. Roswell. Thank you, Mr. Secretary.

Mr. WU. Thank you, Mr. Chairman.

Mr. BUYER. Dr. Roswell, you’re now recognized for 5 minutes.

STATEMENT OF HON. ROBERT H. ROSWELL

Dr. ROSWELL. Chairman Buyer, Mr. Udall, and members of the

committee, thank you for the opportunity to appear before you to

discuss various research and development issues today.

The history of VA research is a history of discoveries that have

benefited all American citizens for many years.

VA did not claim the ownership rights to new technologies that

its research developed, and as a result, VA facilities and laboratories lost the opportunity to benefit financially from those discoveries.

Today, VA does take credit for the work of its researchers. VA’s

technology transfer program requires that VA assert an ownership

interest where appropriate so that VA can build upon its discoveries. Any resulting financial gain is then used on behalf of our

veterans.

VA recognizes that its university research affiliates often have an

interest in an invention made at a VA facility. Although VA can

assert an ownership right in inventions made by its employees, it

cannot do so to the exclusion of our university partners.
9

VA also understands that the Bayh-Dole Act has imposed certain

requirements and responsibilities on university research affiliates.

VA believes that its own rights, responsibilities, and interests are

in no way in conflict with the provisions of Bayh-Dole.

To enhance cooperation between VA and its research affiliates,

VA developed a cooperative technology administration agreement.

Over 50 percent of our major university partners have executed

such an agreement with the VA.

With these agreements, affiliated universities generally take the

lead in patenting and commercializing jointly-owned inventions

and the revenues of that commercialization are then shared by the

university and VA.

In 1988, Congress authorized the creation of VA non-profit research corporations. Public Law 106–117 expanded this authority

to allow VA non-profit corporations to support either or both research and education.

VA currently has 85 active non-profit research corporations and

educational foundations. They enable VA to optimally spend the

funds received from non-VA sources. They are also not subject to

VA federal employment regulations or ceilings.

In 2001, non-profits received almost $180 million in donations,

grants, and interest for research and education activities. They

supported almost 4,700 VA-approved projects, many providing direct benefits to our VA patients.

Non-profits also provide salary support for clinical research personnel who monitor veteran patients enrolled in clinical trials..

Because non-profits have managed funds very efficiently, 90 percent of all non-profit expenditures in 2001 directly supported approved research and education.

Local facility leadership has primary oversight responsibility for

the non-profits. The facility director approves all board members

and serves on the board, as do other facility officials.

A certified public accountant and an external auditor assists each

board of directors in their oversight functions.

We are currently reviewing suggestions that we’ve found very

helpful from VA’s own Office of the Inspector General as well as

the Government Accounting Office. These recommendations will

improve the reporting the oversight activities of non-profits.

At this time, I’m very close to making a decision to create a program office within our research and development office that would

provide greater oversight of non-profit corporations, request the use

of accrual-based accounting techniques as suggested by our inspector general, and solicit each year the management letters as part

of the evaluation done by our auditors of the individual research

corporations.

VA is fully committed to protecting participants in clinical trials

and other research projects.

During the past 3 years, VA facilities received more than $85

million to support research administrative functions. This year, VA

is providing over $30 million per year in administrative support

funding and will make up to an additional $10 million in non-recurring funds available over 2 years for Institutional Review Board

or IRB-related proposals.
10

Participants in clinical trials will also benefit from several other

initiatives, which I have discussed in my formal statement.

I will mention at this time, however, that the Handbook on

Human Subjects Protection is now awaiting final review. It combines the efforts of VA and non-VA experts and has been available

on VA’s web site throughout its development.

Many of its new requirements are good clinical practices that the

field has already begun to adopt.

At the May hearing, I discussed accreditation of VA’s human research protection program through the National Committee on

Quality Assurance, or NCQA.

To date, 15 facilities have been accredited with conditions, two

have received a final result of ‘‘not accredited,’’ and two have received preliminary results of ‘‘not accredited.’’ Four sites still await

final reports.

I have also noted that this first of its kind program had temporarily suspended accreditation reviews in order to conduct quality

improvement activities. VA and NCQA both agreed that the standards needed modification to streamline the review process and clarify selected requirements.

NCQA has now released revised standards for public comment on

September 5th. The revised standards reflect the Institute of Medicine’s recommendations encouraging institutions to involve participants in human research programs.

For the program’s second year, NCQA and VA have agreed to coordinate oversight requirements for VA medical centers that use

institutional review boards of affiliated academic institutions that

may be accredited by another agency, the Association for Accreditation of Human Research Protection Programs, or AAHRPP.

These sites will receive a more limited NCQA survey, and NCQA

will use an accreditation decision that combines the results of both

the NCQA and AAHRPP surveys.

Mr. Chairman, this concludes my statement. My colleagues at

the table, Dr. Mindy Aisen, Dr. James Burris, and Dr. John

Mather, will be happy to answer any questions you or members of

the subcommittee may have.

[The prepared statement Dr. Roswell appears on p. 40.]

Mr. BUYER. We have a 15-minute and a 5-minute vote, so we’ll

try to get some of the questions in. We’re going to have to come

back. I apologize.

In the last 10 years, what would you say are the greatest accomplishments of VA research? What do you think are the top one,

two, three?

Dr. ROSWELL. The accomplishments are significant, but going

back to the concept of the radioimmunoassay, which is now a routine use in all clinical medicine, a development that received the

Nobel Prize——

Mr. BUYER. Which we have no royalties for, right?

Dr. ROSWELL. Excuse me?

Mr. BUYER. Which we have no royalties for?

Dr. ROSWELL. You’re correct, Mr. Chairman.

Mr. BUYER. Okay. Give me number two.

Dr. ROSWELL. The Seattle foot is another example, a prosthetic

device that allows enhanced mobility of lower extremity amputees.
11

Magnetic resonance imaging is another example. Cardiac—— Mr. BUYER. On your second one, do we have any royalties?

Dr. ROSWELL. No.

Mr. BUYER. Okay. On your third?

Dr. ROSWELL. No.

Mr. BUYER. What is your third again?

Dr. ROSWELL. I believe I mentioned MRI technology, magnetic

resonance imaging.

Mr. BUYER. That’s used a lot, isn’t it?

Dr. ROSWELL. It is.

Mr. BUYER. Yeah. All right, we don’t have that one, either.

What’s your fourth? Don’t hold your head low. That’s fine. I won’t

beat up on you. I think you got the point.

Dr. ROSWELL. The point is well made.

Mr. BUYER. The point is well made.

Since the VA has now begun attaining intellectual property

rights, is there any revenue stream as of yet?

Dr. ROSWELL. I’d be happy to get back with you, and Dr. Burris

may know that.

I can tell you this, that the commercialization of new intellectual

properties is difficult—— Mr. BUYER. Dr. Burris, do you know?

Dr. BURRIS. There has been revenue from one invention at the

University of Oklahoma and a second now from Stanford University; so there is a small revenue stream that has commenced.

But, as I’m sure you know, it usually takes 8 to 10 years to really

develop a sufficient portfolio of intellectual properties to develop a

significant revenue stream.

Mr. BUYER. Okay. I want to ask this question. Because I also sit

on the Health Subcommittee of Commerce.

In NIH, you know, they don’t like to talk about their research

and where they’re going and their funding streams, and there’s a

reason we try to keep that sort of distant from Congress.

Since heart disease is the leading cause of premature permanent

disability among Americans, about one in four stroke survivors is

permanently disabled, what are VA’s research priorities on both

heart disease and stroke rehabilitation research?

Dr. ROSWELL. Well, they’re significant. Virtually all of VA’s research portfolio is directed towards diseases that have a high prevalence or a special predilection for veterans in what we call designated research areas.

In addition to directing our research portfolio to ischemic heart

disease or heart attack, stroke, and the rehabilitation, we also have

quality enhancement research initiatives (QUERI) which actually

focus on how we translate the outcomes of research into improved

clinical practice.

These QUERI (Quality Enhancement Research Initiative) processes are part of our health services research component and have

been very successful in taking those technologies and addressing

them specifically.

We do have a QUERI on ischemic heart disease and a stroke

QUERI is planned to begin next year.

Mr. BUYER. In your testimony, you state that over 50 percent of

your major university partners have signed cooperative agreements
12

with the VA. I think that’s great progress, but I understand there

are some major institutions that are still holding out.

Would you please name the major colleges and universities or institutions that are holding out or not cooperating with the VA?

Dr. ROSWELL. If I may preface that answer by stating that VA

has and will continue to assert its intellectual property rights even

absent a cooperative technology administration agreement (CTAA).

Mr. BUYER. I’d like you to do this. Would you provide, as of

today, the list of major colleges and universities and institutions

that have not signed these agreements?

Dr. ROSWELL. Yes, we will. We would be happy to do that.

Mr. BUYER. Thank you. We’re going to take a break right now,

and we’ll go vote, and we’ll return.

[Recess.]

Mr. BUYER. The hearing will come back to order.

Where we left off, Dr. Roswell, was the discussion about some

major institutions that are still sort of holding out.

I don’t know what, necessarily, I mean by holding out. There

might be current discussions with some. Some might be somewhat

recalcitrant. I don’t know.

Will you articulate a little bit better for me and name some of

the major universities whom we’ve had long-standing relationships

with, who may not be so interested in these partnering arrangements?

Dr. ROSWELL. Mr. Chairman, we’ll provide you after the hearing

a complete list, but several of the universities where we have not

yet been able to establish a CTAA and would like to because of the

size and magnitude of the affiliation would include such notable

universities as Yale, Duke, Emory, and the University of Michigan.

Mr. BUYER. When you provide that information, if you could provide to this subcommittee what the funding stream is, what it presently is and what it has been over the last 10 years.

I want to know how much money is going to these universities

and why they’re not cooperating with us.

(See pp. 93 and 97.)

Dr. ROSWELL. Yes, sir.

Mr. BUYER. Okay? One thing Congress knows how to do is to get

attention, and we’re going to do that.

At this point, let me yield to Mr. Udall for any questions he may

have.

Mr. UDALL. Dr. Roswell, before we discuss research, could we

take a moment to discuss the state of VA health care today?

Some 300,000 veterans are currently waiting to receive medical

care from the VA. Other veterans are waiting just to enroll.

Do you agree that the VA does not have sufficient resources at

this time to provide timely quality health care?

Dr. ROSWELL. Well, certainly with the current open enrollment

process, Mr. Udall, we have had a recent demand for care that has

exceeded our capacity.

Mr. UDALL. Turning now to research, generally, a wide variety

of research projects are conducted at VA facilities.

Does the research also include research programs for, let us say,

cancer studies or research on substance abuse?

Dr. ROSWELL. Yes, they do.
13

Mr. UDALL. Now, I’d like to address at this point the issue of

costs associated with research conducted at VA facilities.

Can you briefly explain the various ways research at the VA is

funded, beginning with VA-funded research and then including outside funding resources?

Dr. ROSWELL. There are a variety of mechanisms to fund VA

research.

Our own VA research appropriation is an intramural program

that provides over $370 million a year, the majority of which is directed to VA-sponsored and funded research.

But that only accounts for roughly a third of the total portfolio

of research done in VA.

Almost an equal amount of research, close to $400 million a year,

is funded through grants from the National Institutes of Health.

In addition to NIH money that’s received through VA investigators, there are a variety of other sources, including pharmaceutical

companies who are interested in developing new products to market, and we’re involved with a variety of private endowments, a variety of other sources of funds that create a total research portfolio

in excess of $1 billion a year.

Mr. UDALL. And what percentage is the NIH of that?

Dr. ROSWELL. It’s roughly a third of the total portfolio.

Mr. UDALL. Of the 1 billion. Let’s talk about outside funding

sources.

Research at VA facilities may incur direct expenses associated

with a particular research project; is that correct?

Dr. ROSWELL. That is correct.

Mr. UDALL. And direct costs are usually covered by the grant or

the contract provisions; is that correct?

Dr. ROSWELL. In a non-VA institution, direct costs would typically be recovered by the institution. In the VA, we actually use

dollars to cover those direct costs, which are predominantly faculty

salary or staff salary.

Mr. UDALL. Now, there are also indirect costs associated with the

project. Our witness on Panel 3, Mr. Kirschenman, is an expert in

that area.

Can we assume the VA contracted with him to determine indirect costs VA-wide because the VA was in some way interested in

those costs?

Dr. ROSWELL. Absolutely. We’re very concerned about the indirect costs associated with research, our indirect costs, if you will,

the facilities and administration costs, or F&A costs associated

with the VA research.

According to the report you cite, it was slightly over 23 percent

of the total cost of the research grant.

Mr. UDALL. And could you tell me why you’re so interested in

those, the research costs?

Dr. ROSWELL. Well, I think it’s important to understand the cost

of the research, but as this committee has discussed before, we’re

also interested, where appropriate, in recovering the indirect costs

associated with research.

Mr. UDALL. And those costs also impact your other programs

that you’re running, don’t they?
14

Dr. ROSWELL. They clearly do. The indirect costs are borne on

our medical care appropriation, and to the extent that those indirect costs increase with an increasing research portfolio, it does

place a burden on the total budget authority the department has.

Mr. UDALL. Dr. Roswell, are you aware that Public Law 90–30,

Section 507, dated June 24, 1967, once required that appropriations to the public health service available for research, training,

or demonstration project grants pursuant to the Public Health

Service Act shall be available on the same terms and conditions as

apply to non-federal institutions for grants to the same purpose

federal agencies, including the Veterans Administration?

Dr. ROSWELL. I have read that previously, yes.

Mr. UDALL. The way I read that is, if a grant is good for a nonfederal institution, it’s also good for a federal institution. Is that

the way you read it?

Dr. ROSWELL. I’m not an attorney, but that was my understanding of the law as it was written in 1967.

Mr. UDALL. Did you ever get—are you aware of any attorneys’

advice within the department as to that particular issue? Is your

understanding from talking with your attorneys?

Dr. ROSWELL. Our General Counsel has advised that there is no

legal barrier currently to preclude us to recover indirect costs.

Mr. UDALL. With regard to the language I just mentioned in Public Law 9031, similar language exists today in Title XLII, USC

Chapter 60(a), Subchapter 1, Part (b), Section 238, titled ‘‘The

Availability of Appropriations for Grants to Federal Institution.’’

It specifies that for some specific research projects, like substance

abuse, the public health service shall assure that the same terms

and conditions as apply to non-federal institutions also apply to

federal institutions.

It also stipulates that grants to federal institutions may be funded at 100 percent of the cost.

Now, since 1989, has NIH provided indirect costs to the VA for

NIH research grants?

Dr. ROSWELL. No, they have not.

Mr. UDALL. Do you know if NIH provides indirect costs to any

non-federal institution?

Dr. ROSWELL. Well, certainly my assumption is that they do.

Mr. UDALL. Do you know any of those?

Dr. ROSWELL. Non-federal institutions?

Mr. UDALL. Yeah.

Dr. ROSWELL. Well, they’re routinely provided to most, or to academic institutions.

Mr. UDALL. And as you’ve said, it’s on a routine basis, so they

do this all the time?

Dr. ROSWELL. That’s my understanding, yes.

Mr. UDALL. What is the VA doing at this point to try to move

this process along in terms of recovering indirect costs?

Dr. ROSWELL. Following the previous hearing before this committee, we actually have had discussions with NIH. We agreed to put

together a group and negotiate indirect costs. However, that effort,

to date, has not been successful.
15

We do have a meeting tentatively scheduled for next month to

again renew discussions about what mechanism or term might be

used to calculate an equitable indirect cost rate for the VA.

Mr. UDALL. Coming to an indirect cost rate isn’t that hard, is it,

based on this Kirschenman Study and others? I mean, it would be

something pretty easy to do, don’t you think?

Dr. ROSWELL. Certainly, he’s an expert in the field, but he was

able to provide us very precise data on indirect costs.

Mr. UDALL. So what’s the problem you’re running into with the

NIH?

Dr. ROSWELL. Well, the position of NIH—and I certainly won’t

presume to speak for NIH, who I believe will testify later in this

hearing.

But their position, as I understand it and based on my discussions with them, is that they don’t believe it would be appropriate

to fund VA for its full indirect costs, as is provided to other institutions, because VA has an appropriation which, in fact, could bear

some of the costs or does bear some of the indirect costs currently

associated with VA research.

So what they’re asked us for is a mechanism to look at only the

incremental costs associated with administering a specific NIH

grant.

That type of incremental or marginal cost basis involves accounting principles that we don’t routinely employ, and it’s created a

very onerous challenge for us to try to come up with the kind of

accounting methodology that would satisfy their request.

Mr. UDALL. They don’t require that of universities, though, do

they?

Dr. ROSWELL. I don’t believe so.

Mr. UDALL. Okay. Thank you very much, Mr. Chairman.

Mr. BUYER. Thank you.

Dr. Mather, could you give us an assessment on the improvements and corrections of human subject protection of the most vulnerable patients that have been made by the VA?

Mr. MATHER. Mr. Chairman, in the last hearing, I think there

was a long iteration of a number of those, but from the standpoint

of my office, ORCA, and the Office of Research and Development,

there has been a lot of work that has been accomplished.

In Dr. Roswell’s testimony, there was allusion to a number of

items that the Office of Research and Development has done.

Mr. BUYER. Bring us up to date from the last hearing forward.

Dr. MATHER. Since the last hearing, in my immediate office we

have completed what we’ve characterized as Senior Executive Seminar, so that all VISNs have had these sessions, of a couple of days,

where the senior management have been brought up to speed on

all of the aspects of those regulations and guidances that protect

human subjects.

We have continued to track the results of the NCQA-sponsored

accreditation process. We have continued to track those sites which

were found to be not-accreditable at this point in time, and tracking on the various recommendations we have made.

We received information on an additional site that was not accredited by NCQA last week, and yesterday, we had at that particular VA medical center, staff from my office checking to make
16

sure that there was no medical hurt to the subjects enrolled in the

research there or no apparent egregious violations of the regulations. We found, indeed and in truth, that there were no serious

violations in this regard.

This particular facility intends appealing its Non-Accredited status, and that’s due around the 10th of October. The following week,

we will be in there with a full team doing what we call a Systematic Post-Accreditation Review.

Mr. BUYER. Which facility was not accredited?

Mr. MATHER. This was the Northampton VA medical center in

Massachusetts.

Mr. BUYER. All right.

Dr. MATHER. We also have continued, though, with one particular effort, and that is to try and pull together what we’re calling

a Quality Assurance/Quality Improvement Tool-kit.

One of the key standards in the NCQA accreditation is for individual VA medical centers to put together a first-rate QA/QI program for its human research activities.

We anticipate that with all of the releases of copyrights and so

on that we have received, that that particular Tool-kit will be available by the end of this month in a CD ROM format. This we have

done for various of our other particular products that have gone

out, and we think that this kind of activity is very, very important.

We continue to use our web site to great effect in keeping it up

to date, and with the various information letters and alerts.

So I think that gives you sort of a sense, sir, about what we’re

continuing to do in ORCA.

Mr. BUYER. Thank you. Dr. Aisen, I have attempted not to

equivocate where I stand on the issue of the VA enforcing their intellectual property rights.

Do you have any comment on the testimony and questions or answers you’ve heard here today, since you’re heading up this technology transfer?

Dr. AISEN. Well, I think that Dr. Roswell and Dr. Burris have

given you pretty complete information.

We have added four more university partners. That includes

‘‘fair’’ Harvard—I think that that helped us get a few more cooperative technology administration agreements.

I agree completely with the list of uncooperative universities, as

mentioned by Dr. Roswell.

Also, we do have some progress, in terms of commercializing, beyond what Dr. Burris mentioned, including our first two licenses.

One has already got under way, and the other will be signed within

a month. These will be the first VA exclusively funded, nurtured,

patented, and marketed.

I guess I am a little disappointed in what I heard from Commerce today. I thought that we would hear something about the

dual appointment personnel issue.

Indeed, there is a need for the country as a whole, for the academic community as a whole, to understand that there are people

who have dual appointments and that there is compatibility between Bayh-Dole and the Executive Order. And that we do have to

work together to share ownership.
17

We (in VA Technology Transfer) never forget who we work for.

We work for the veterans. We only want to support (dissemination

of) quality research. Money is not irrelevant, but it’s hardly the

only thing.

So we’re not interested in duplicating the universities’ efforts and

we’re not interested in taking what doesn’t belong to us. We just

want to be included in the process.

And I think that there really is a need for Commerce to officially

recognize that there is a need for them to operationalize the compatibility of Bayh-Dole and the Executive Order ownership—coexisting in one inventor, in some cases.

Mr. BUYER. Dr. Aisen, candor is a bad term in this town, and I

appreciate your stepping forward with your candor and giving your

testimony. I appreciate it.

I also would appreciate it if you would make an appointment

with my office, and come by, so we can talk.

Dr. AISEN. Okay.

Mr. BUYER. All right. This concludes Panel 1.

On Panel 2, we have Mr. Michael Slachta, the Assistant Inspector General for audit, Department of Veterans Affairs. Also testifying will be Ms. Cynthia Bascetta, Director of Veterans’ Health and

Benefits Issues, United States General Accounting Office.

Mr. Slachta, you are now recognized for 5 minutes.

STATEMENTS OF MICHAEL SLACHTA, JR., ASSISTANT INSPECTOR GENERAL FOR AUDITING, OFFICE OF INSPECTOR GENERAL, DEPARTMENT OF VETERANS AFFAIRS, ACCOMPANIED

BY JOHN BILOBRAN, DEPUTY ASSISTANT INSPECTOR GENERAL FOR AUDITING, OFFICE OF INSPECTOR GENERAL, DEPARTMENT OF VETERANS AFFAIRS; AND CYNTHIA A.

BASCETTA, DIRECTOR, VETERANS’ HEALTH AND BENEFITS

ISSUES, GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY

MICHAEL T. BLAIR, JR., ASSISTANT DIRECTOR OF HEALTH

CARE, GENERAL ACCOUNTING OFFICE

STATEMENT OF MICHAEL SLACHTA, JR.

Mr. SLACHTA. Mr. Chairman, I am accompanied by Mr. John

Bilobran, deputy assistant inspector general for auditing.

We’re here today to report back to the committee on the results

of our work on reviewing the comments to the department’s updated response to the subcommittee’s questions and to summarize

our fiscal year 2002 results of our on-site reviews at two VA nonprofit research and education corporations.

The department’s updated submission to the subcommittee’s

questions is more responsive than the first.

Some questions were not answered because the information was

not available to the department. For those questions, the department has offered to compile national data on corporate expenditures and fund use.

Compiling data nationally will improve visibility over corporate

operations and the business relationship these corporations have

with VA.

It will also improve the ability of the department to oversee corporate activities and ensure research funds are used only to benefit
18

VA research. Aggregation of revenues and expenditures nationally

will also enhance congressional visibility over corporate activities.

Examples of the types of information the department should compile include:

‘‘Other donations’’ corporations make, such as those made to the

General Post Fund;

Reimbursements made from nonprofit research corporations to

the medical care appropriation;

Medical centers that were reimbursed and the amount of each reimbursement;

Research projects terminated and the reasons for their termination; and

Research projects that were completed, and for those that were

completed that had funds remaining, the amount of remaining or

unused funds.

The department in its comments also stated that it, ‘‘will instruct

its facilities to determine how much of VA-approved research funds

were administered by VA research corporations.’’

We support that direction and believe the department should

also ensure that work performed by corporations is consistent with

national departmental goals.

In fiscal year 2002, we reviewed the operations at two nonprofit

research corporations. Overall, we concluded that the corporations

benefitted VA by making available corporate funds to renovate department research facilities, obtain state-of-the-art research equipment, and administer research projects.

Nothing came to our attention indicating that controls over expenditures and fund usage at these facilities were inadequate.

However, we believe there are opportunities to further improve

oversight and accountability of research and education corporations

without losing the flexibilities intended by the Congress when it

authorized the establishment of these corporations.

In particular, we believe oversight would benefit by:

Requiring the corporations to adopt accrual basis accounting;

Standardizing financial reporting;

Establishing a department office to oversee corporate annual

reporting;

Improving departmental guidance defining research expenditures; and

Looking at the feasibility of consolidating research corporations,

particularly in locations where VA facilities have integrated or

merged operations.

Our reviews found that:

Standardizing financial reporting will enhance the corporation’s

ability to identify, charge, and recover appropriate overhead costs

for the services provided.

The independent annual certified financial reports that corporations submit in support of congressional reporting requirements are

not designed to provide the level of detail needed to verify the need

and justification of the expenditures.

Standardized financial reporting, beginning with a standardized

chart of accounts , would enhance visibility over corporate financial

activities;
19

Departmental responsibility for collection and summarization of

the annual financial and performance information is currently rotated among VHA research staff, and the information is forwarded

without substantive review.

We believe the consistency and accuracy of reporting would be

improved by assigning responsibility to a VA program office that

would review the information and take appropriate followup actions to ensure annual reports are accurate, reliable, and complete;

The department should look for opportunities to consolidate the

number of research corporations, to avoid unnecessary administrative costs, reduce unnecessary infrastructure , and facilitate oversight by reducing the number of corporate entities.

The department has integrated and consolidated many of its

health care facility operations. However, similar actions to merge

VA research and education corporations have not followed.

We feel the VA could benefit by initiating a study to assess the

feasibility of consolidating the number of entities.

VA research and education corporations provide significant benefits to VA, but improved financial and administrative control can

improve oversight and accountability.

I will be pleased to answer any questions the committee may

have.

[The prepared statement of Mr. Slachta appears on p. 47.]

Mr. BUYER. Ms. Bascetta.

STATEMENT OF CYNTHIA A. BASCETTA

Ms. BASCETTA. Mr. Chairman and Mr. Udall, I’m pleased to be

here today to discuss nonprofit research corporations, a growing

component of VA research. With me today is Michael Blair, the assistant director who led the review.

As we’ve discussed, VA research contributes to the discovery of

new treatments for diseases and disabilities that affect veterans,

and the Nation’s population as a whole. Funding from the nonprofits increased almost 140 percent between 1996 and the year

2000, and totaled almost $175 million in fiscal year 2000.

In 1994, the inspector general conducted a major review of nonprofits and raised concerns about the adequacy of VA’s policies and

guidance relating to budgeting, accounting, and oversight of these

corporations.

After your hearing this May, you asked the IG and us to provide

more current information on VA’s nonprofit corporations. Today, I’d

like to focus on the processes VA has in place to detect conflicts of

interest in research supported by the nonprofits and VA’s monitoring and oversight of their activities.

First, though, I’d like to tell you about what we found about the

benefits of corporations.

As a flexible funding mechanism, they have, indeed, enhanced

VA research, infrastructure, and environment. For example, the indirect funds that we’ve talked about this morning that have been

collected by the nonprofits have been used to renovate laboratory

space, purchase equipment, maintain VA research libraries, and

cover travel expenses to conferences. In turn, the research environment has been better able to attract highly qualified physicians

who often provide patient care, as well. Researchers also told us
20

that funding flexibility enables the nonprofits to respond to their

individual project needs. For example, two nonprofits were able to

quickly purchase specialized equipment that would have taken

months if they had had to go through VA’s normal contracting

process.

So clearly, flexibility can yield benefits, but it also carries risk.

You specifically asked us to look at the processes in place to detect

potential conflicts of interest that could arise. We found that investigators on research projects administered by the nonprofits must

follow federal statutes and regulations applicable to federal employees concerning both conduct and conflict of interest. NIH and

FDA impose additional requirements for financial disclosure on

principal investigators. We also found that investigators at three of

the five nonprofits we visited were required to disclose their financial interests for each project that they conducted.

The Secretary of VA has delegated responsibility for overseeing

its nonprofit corporations to the local medical center directors, who

are also nonprofit board members. They, as well as the chief of

staffs, are required to file financial disclosure forms. However,

headquarters does not review these forms and compare them to ongoing research at the medical facilities. Similarly, although each

nonprofit submits its financial statements and management letters

to headquarters, headquarters relies on local oversight to assure

that any deficiencies noted by independent auditors are corrected.

In this regard, we were very glad to hear this morning Dr.

Roswell’s statement in his oral testimony that he intends to deal

with these kinds of weaknesses.

Beyond annual audits, officials at the five nonprofits we reviewed

told us that they had not been the subject of systematic substantive

review. Without routine national oversight, such as through VA’s

Office of Research and Development, it would be difficult to ensure

that areas for improvement are identified and that the nonprofit

corporations correct any problems noted by the independent auditors. VA also has not evaluated, in a broader sense, the nonprofit

corporations to measure their effectiveness or to compare their operations to see if they can achieve even more of these valuable benefits.

In conclusion, VA is placing increasing reliance on the nonprofit

research corporations as they become an integral component of the

research program. Indeed, because of the large amount of funding

that now flows through the nonprofits, the absence of VA oversight

is not inconsequential. While medical center directors provide an

essential oversight function locally, they are not at arm’s length

from the nonprofits. As a result, VA headquarters could consider

national oversight to better ensure that the benefits of the nonprofit corporations are maximized and achieved in ways that safeguard VA’s interests. Such high-level oversight of both financial activities and program effectiveness would be critical elements of continued success.

I’d be happy to answer any questions that you might have.

[The prepared statement of Ms. Bascetta appears on p. 50.]

Mr. BUYER. I’d like to thank both of you. It’s unfortunate that

you had to take a re-look at an issue that should have been accomplished the first time.
21

Mr. Slachta, you’re very kind in saying that some of the information may not have been completely available.

But I want to thank you for going back, and I appreciate your

testimony. I had a chance to review it.

I will have some questions that I will submit for the record for

you. At this time, I yield to Mr. Udall for any questions he may

have.

Mr. UDALL. Thank you, Mr. Chairman.

Mr. Slachta, what is the likelihood there is a commingling of VA

funds dedicated for research and VA funds dedicated for health

care at the indirect cost level?

Mr. SLACHTA. It’s happening. There’s no question, there is a commingling.

Mr. UDALL. Could you explain a little bit how that happens?

Mr. SLACHTA. Well, VA doesn’t attempt to separate the funds,

doesn’t attempt to separate the costs.

For example, everything from management, the R&D committees, their salaries and their support efforts are paid out of the

medical care appropriation.

Environmental sciences, building maintenance, those are coming

out of medical care appropriation.

Those are just some examples. I mean, there are many, many examples.

Mr. UDALL. And here’s another example. Let’s say for fire coverage, if you had an on-campus nursing home and an on-campus

research facility, and you’re dealing with the fire coverage. The facility hosts VA and NIH-sponsored research.

So effectively, the VA is providing free fire coverage for the NIH

researchers? Is that——

Mr. SLACHTA. Yes, that’s correct.

Mr. UDALL. So that kind of thing is being repeated frequently in

the VA?

Mr. SLACHTA. In every VA facility.

Mr. UDALL. Yeah. Okay.

I would ask the GAO the same question.

Ms. BASCETTA. We didn’t do the intensive type of review that the

IG conducted, but we did note that, certainly these kinds of situations that you’re describing are commonplace.

Mr. UDALL. Thank you. Mr. Chairman, I yield back. Thank you.

Mr. BUYER. Thank you for your testimony. This concludes the

second panel.

For that third panel, the committee recognizes Mr. Antonio

Laracuente, chairman of the National Association of Veterans’ Research and Education Foundations; Dr. Wendy Baldwin, Deputy

Director for Extramural Research at the National Institutes of

Health; Mr. John Bradley, Director of Finance at the Office of Research and Development at the Department of Veterans Affairs;

and Mr. Henry Kirschenman.

Go ahead.
22

STATEMENTS OF ANTONIO LARACUENTE, EXECUTIVE DIRECTOR, ATLANTA RESEARCH AND EDUCATION FOUNDATION

(AREF) AND CHAIRMAN, NATIONAL ASSOCIATION OF VETERANS’ RESEARCH AND EDUCATION FOUNDATIONS (NAVREF);

HENRY G. KIRSCHENMAN, JR., CPA; JOHN A. BRADLEY, DIRECTOR OF FINANCE, OFFICE OF RESEARCH AND DEVELOPMENT, VETERANS HEALTH ADMINISTRATION, DEPARTMENT

OF VETERANS AFFAIRS; AND WENDY BALDWIN, M.D., DEPUTY DIRECTOR FOR EXTRAMURAL RESEARCH, NATIONAL

INSTITUTES OF HEALTH

STATEMENT OF ANTONIO LARACUENTE

Mr. LARACUENTE. I guess I’ll go first.

Good afternoon, Mr. Chairman, and members of the subcommittee. I am Antonio Laracuente, executive director of the VA affiliated nonprofit in Atlanta and chairman of NAVREF.

As you are aware, investigators from the General Accounting Office spent the summer conducting in-depth site visits of five foundations. My spoken testimony focuses on my own experience with

the GAO auditors and pending legislation that would improve nonprofit accountability.

My foundation was the first one the GAO visited. After a quick

review of the IG and GAO testimonies, it appears that several

major themes were adequately addressed by the nonprofits, including why does the VA need nonprofits and what rules and regulations apply to the nonprofits?

However, we would like to verbally respond to the recommendation on the number of nonprofits and address the other issues in

a written response, specifically the standardization of accounting

practices and the chart of accounts.

Does the VA need 86 nonprofits?

Again and again, the GAO site visitors asked, does each VAMC

need its own nonprofit?

My unequivocal answer was yes. The many advantages of a oneon-one relationship between a VAMC and a nonprofit include:

Local oversight by a board that holds VA interests paramount;

Management that is invested in the success of the medical center’s research program;

Responsiveness to facility and individual investigator needs;

On-site services resulting in convenience for investigators; and

Quick turnaround on procurement and hiring.

Regarding increased accountability, NAVREF has given serious

consideration to concerns about accountability expressed by the

members of the Health and Oversight Subcommittees during the

May 16th hearing.

In our view, two relevant items are pending.

First, NAVREF has concerns about the content of H.R. 3645, Section 7, ‘‘Improved Accountability of Research Corporations.’’

We strongly recommend that this section should be amended to:

First, impose on all of the corporations a requirement that within

3 years of enactment, their annual audits should be performed in

accordance with generally accepted government accounting

standards;
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Second, each year require the inspector general of the Department of Veterans Affairs to review the most recent audit of at least

10 percent of the corporations.

These two items would address the primary concerns expressed

by the members of the subcommittee during the May 16th hearing.

As detailed in Attachment A of our written testimony, the other

overly burdensome and costly requirements specified in Section 7

should be eliminated.

NAVREF has no objection to increased accountability, but feels

the requirements put in place to achieve this objective should be

reasonable and purposeful.

The second pending item focuses on contracts between VA medical centers and nonprofits.

As you may be aware, the corporations have been seeking an approved means of better serving the VA research and education missions through use of VA’s contracting authorities. Allowing VAMCs

to contract with the nonprofits to support VA-funded programs subject to a VA-approved contract would greatly increase accountability.

A reimbursement authority has been suggested. However, we feel

that this would provide less accountability than using VA’s existing

contracting authorities, which have a full body of implementing

regulations to ensure adequate controls.

Again, we strongly encourage the House to approve contracting

between VAMCs and nonprofits.

Thank you for your consideration of our views. I’d be pleased to

answer any questions.

[The prepared statement of Mr. Laracuente, with attachment,

appears on p. 64.]

Mr. BUYER. Mr. Kirschenman.

STATEMENT OF HENRY G. KIRSCHENMAN, JR.

Mr. KIRSCHENMAN. Mr. Chairman and members of the subcommittee, I was engaged by the Veterans Health Administration

to identify the indirect costs associated with its research function

and to calculate the indirect cost rates that would apply to its research grants.

More specifically, I calculated the indirect costs associated with

the National Institutes of Health grants. The indirect cost rate for

those grants is 23. Five percent of total direct costs.

I submitted my calculations in May of 2002. I am here to respond

to questions which you may have about the rationale behind the

rates or the calculation itself.

In identifying the research costs and calculating the rates, I followed the costing concepts and guidance contained in the Cost Accounting Handbook of the Department of Veterans Affairs and the

several documents issued by the Office of Management and Budget,

specifically:

Statement Number 4, Managerial Cost Accounting Concepts and

Standards for the Federal Government, issued by the Federal Financial Accounting Advisory Board;

The Circulars A–21, A–122, and A–87; and

The Federal Acquisition Regulations (FAR).
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The three circulars govern the costing and other federally supported programs at universities, other nonprofit institutions, and

state and local governments, respectively.

The Federal Acquisition Regulations govern the costing of federally supported projects conducted by commercial organizations.

The guidance contained in these publications reference and conform with generally accepted accounting principles and are consistent with each other. In my opinion, application of the guidance contained in those documents results in indirect costs rates that reasonably reflect the costs of performing research.

I also consulted OMB Circular A–25, which establishes federal

policy regarding user charges to be assessed by government agencies for the use or sale of their services or goods.

The guidance for determining the cost of such services and goods

is consistent with the guidance in the documents I just cited.

Again, the rates I calculated conform with the costing and charging

concepts contained in that circular.

The critical concept contained in all of these documents is of benefit. That is, an activity must provide benefit to a project for its associated costs to be recognized as a charge against it. All the costs

included in my rate calculations meet that criterion.

The methodology I followed in identifying the indirect costs related to the research conducted by the Veterans Health Administration and to calculate the rates conform with the costing concepts

contained in these cited document, with two exceptions.

The rates I have calculated do not include amounts for depreciation or a use allowance for VHA buildings and equipment used in

the conduct of the research as provided for in all the cited documents, or a rate of return factor on these assets as provided for in

the FAR and recommended in Circular A–25.

Additionally, there are other costs which might be argued to benefit the research that the Veterans Health Administration opted

not to include in the interest of conservatism. Thus, it is my opinion that the calculated rates themselves are conservative.

[The prepared statement of Mr. Kirschenman appears on p. 84.]

Mr. BUYER. I yield to Mr. Udall for any questions.

Mr. UDALL. Thank you.

Mr. Bradley, you heard the testimony of the assistant inspector

general and the GAO in the commingling. Do you believe at the indirect costs level funds, between the research functions and the

health care functions sometimes commingle?

Mr. BRADLEY. Yes, I do.

Mr. UDALL. If this is true, then a non-reimbursed indirect costs

must be paid from some VA source, and the health care side of

VHA would be sheltering some of the indirect cost burden; is that

correct?

Mr. BRADLEY. I believe that is correct.

Mr. UDALL. The VA currently covers these indirect costs associated with NIH grants. Could this have an unwanted impact of any

degree on veterans’ health care?

Mr. BRADLEY. Well, I think that’s, it’s hard to prove with numbers, because of the commingling you reference, Mr. Udall.

However, I think intuitively, if you look at the number, the dollar

number of grants that are now being conducted at VA facilities,
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which in 2001 actually exceeded the amount of VA grants being

conducted in VA facilities, that that conclusion is somewhat inescapable.

Mr. UDALL. During the hearing on this topic in May, Ms. Baldwin indicated that she would be happy to sit down with the VA to

establish what would be an appropriate level of compensation for

additional cost.

Did this meeting occur, and what level of agreement was

reached?

Mr. BRADLEY. We did schedule a meeting in September for what

I thought was going to be a meeting to establish a rate.

Because of the proceedings in the previous hearing, I thought we

were at a point where we agreed that, some kind of indirect rate

would be appropriate for VA, and it was just a matter of determining what that rate should be.

Unfortunately, we weren’t able to reach an agreement. NIH

doesn’t believe that an indirect rate for VA is appropriate, and so

they did not want to discuss at that particular time an indirect rate

for the VA.

Mr. UDALL. So basically, the position is they’re taking a hard line

with regard to any indirect reimbursement?

Mr. BRADLEY. Well, I think some of this is somewhat semantical.

They refused to discuss an indirect rate, but they are willing to

pursue discussions about incremental cost reimbursement.

Some of this I think, in my opinion, is somewhat semantical, but

you can ask Dr. Baldwin further about that.

Mr. UDALL. Could you explain a little further ‘‘somewhat semantical’’?

I mean, I think we heard earlier that there’s a big difference between incremental and indirect, that incremental is something very

hard to find, I believe.

Mr. BRADLEY. Yes. We did not know, going into this meeting,

that VA was going to be held to a standard different than, say, universities who are negotiating an indirect cost rate.

That’s why we asked Mr. Kirschenman to help us, because that

was a process he’s familiar with, and it’s one that the VA is not

familiar with, since giving up the indirect costs rates it had in the

late 1980s.

Mr. UDALL. Thank you, Mr. Bradley.

Mr. Kirschenman, to your knowledge, does NIH recognize and

pay indirect costs on its contracts awarded to federal agencies?

Mr. KIRSCHENMAN. Yes, I believe it does.

Mr. UDALL. And from your knowledge, does NIH pay indirect

costs to universities, nonprofit entities, state and local governments, and commercial organizations which conduct research under

NIH grants?

Mr. KIRSCHENMAN. Yes, if they’re calculated in accordance with

the circulars I mentioned, yes.

Mr. UDALL. And in your opinion, are the so-called indirect costs

incurred by the VHA and other research-performing entities and

reflected in their indirect cost rates real and necessary costs as opposed to profit, for example?

Mr. KIRSCHENMAN. Yes. The idea of indirect costs being a form

of profit I think was discredited many, many years ago, and it’s
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universally accepted that they are real costs and necessary for the

effective performance of research grants and contracts.

Mr. UDALL. In your opinion, is there any fundamental conceptual

difference in determining the costs associated with grants as opposed to contracts?

Mr. KIRSCHENMAN. No, there isn’t, and the indirect cost rates

that are calculated for other institutions under the circulars I mentioned are commonly applied to contracts, as well as grants.

Mr. UDALL. And would an indirect cost rate calculated under the

documents you cited apply to contracts as well as grants?

Mr. KIRSCHENMAN. Yes, it would.

Mr. UDALL. Thank you, Dr. Kirschenman.

Dr. Baldwin, again, thank you for appearing today.

In May, you stated that you have an indirect cost rate with some

institutions of 8 percent. Are there any other rates?

Dr. BALDWIN. There are indirect cost rates, for universities, for

companies, and for other entities with which we do business.

Indirect cost rates are negotiated with entities where we do business, such as universities or small businesses.

The circulars that Mr. Kirschenman referred to really don’t apply

to federal agencies: It would be quite unusual to calculate a full indirect cost rate for another federal agency.

Mr. UDALL. What are the other rates in addition to this 8

percent?

Dr. BALDWIN. They’re very variable. The administrative——

Mr. UDALL. What’s the range?

Dr. BALDWIN. The range is probably from 25 to 30 percent, up

to 100 percent.

Mr. UDALL. And you didn’t have an indirect cost rate for foreign

institutions, if I read your testimony correctly from May?

Dr. BALDWIN. Yes. That’s new.

Mr. UDALL. Mr. Chairman, my overall concern is that this may

be having an indirect and unwanted impact on our veterans and

I’m sure I have many follow-up questions concerning this undesirable impact, but at this point, I would yield back to you and I have

several closing comments, but I’ll certainly defer to you on any

closing.

Mr. BUYER. The subcommittee will be submitting written questions to all those who testified today, Mr. Udall, so you’re more

than welcome to submit written questions and follow up.

I do have one.

Mr. Laracuente, concerning the recent move to allow the nonprofit corporations to contract services to the VA, why do you believe it’s necessary to codify this into law, considering that both the

GAO and the IG have said that the nonprofit research corporations

already have the power to donate services to the VA as an in-kind

expense?

Mr. LARACUENTE. The main reason is, in 1999, the general counsel determined that a transfer of funds from VA appropriated dollars could not occur under a contractual arrangement.

Our feeling is that the nonprofit can provide services to the VA

and have the appropriate grant pay for, or the appropriate award

pay for those services that would be at cost.
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So, for example, you have a core facility that is supported by a

VA nonprofit corporation to the tune of several hundred thousand

dollars per year. They have to receive compensation to cover the

cost for any reagents or any personnel that are involved, contracts

for the equipment, and so forth.

So we believe that those costs which are associated with running

this facility can be placed into many of the grants that are administered by the nonprofit corporations, such as NIH grants or such

as private donated grants, but they should also come from every

single source, so there’s continuity and there’s consistency in the

recovery of these costs associated with running the facility.

Mr. BUYER. Could we reasonably expect that the nonprofits

would continue to donate these services to the VA if they could sell

them to the facility under a contract?

Mr. LARACUENTE. The nonprofit would provide the services to the

VA and the VA would sell them to another entity? I don’t believe

that could happen under what we propose.

Mr. BUYER. Can we reasonably expect that the nonprofits would

continue to donate these services to the VA if they could sell them

to the facility under a contract?

Mr. LARACUENTE. Yes, sir.

Mr. BUYER. I don’t know. My instincts aren’t with you. I don’t

know. I hear your testimony. I give great deference to the GAO and

IG’s testimony. I’m just letting you know what my instincts are

telling me. All right? I’ll be a good listener.

Let me yield to Mr. Udall for any closing comments he’ll make.

Mr. UDALL. Thank you, Mr. Chairman.

Dr. Baldwin, and if you’re still in the room, Dr. Roswell, you may

wish to consider this today.

We have heard today that the VA has long waiting lines for

health care, due to a shortage of resources.

We have also heard, from an expert who has testified, that the

VA clearly has indirect costs; that VA’s covering of indirect costs

associated with NIH grants may have an unwanted impact on the

accessibility of veterans’ health care; that NIH provides indirect

cost fees to non-federal institutions, including foreign institutions,

and that for some specific types of grants, Title XLII addresses the

issue of the same terms and conditions for grants to federal and

non-federal institutions.

Why can and why should NIH exclude VA from indirect costs?

I would ask you to consider the law and consider the need for our

veterans.

I think with that, Mr. Chairman, I would yield back to you and

thank this third and final panel for their participation and attendance today.

Mr. BUYER. Thank you, Mr. Udall. I want to thank all the panels

for testifying today.

I think the VA has made good progress in the area of securing

a fair share of intellectual property rights. As we heard today,

there is still plenty of work to do.

I am most interested, again, Dr. Roswell, in seeing a list of major

institutions who are not cooperating, and I also want to see that

revenue stream.
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We will continue to monitor the VA efforts to ensure human research subject protections to the maximum extent possible.

I thank all of you for your attention and testimony.

This concludes the hearing.

[Whereupon, at 1 p.m., the subcommittee was adjourned.]
(29)

A P P E N D I X

OPENING STATEMENT FOR CONGRESSWOMAN JULIA CARSON

RANKING DEMOCRATIC MEMBER, SUBCOMMITTEE ON OVERSIGHT AND

INVESTIGATION

In May of this year, we had a joint hearing with the Health Care Subcommittee

on issues remarkably similar today’s hearing issues on Department of Veterans Affairs (VA) medical- and health-related research.

At the May hearing, the Subcommittee heard testimony in four specific areas regarding VA research activities. We focused on the accountability of VA Research

Corporations and we reviewed the VA’s once relaxed approach to securing intellectual property rights and patents for VA discoveries and inventions. We also reviewed VA’s research program and associated protocols and safeguards for the conduct of human subject research. Additionally, we explored the general fairness of

a possible add-on for indirect costs associated with research conducted under grants

from the National Institutes of Health.

In May, I established one goal to guide the review process for this series of Subcommittee hearings. Our goal must be to assure the effective and safe conduct of

research to better healthcare and to improve the general health of veterans and of

other Americans.

Issues remain in all four issue areas. For example, as long as VA conducts human

studies research, this Committee will provide aggressive oversight. When we heard

testimony about human subject research in May, the human subjects program was

not problem free, but it generally appeared to be responsibly conducted with an adequate level VA oversight. The Committee will visit this area as necessary to assure

safe and responsible human subject research.

Two other issues remain from our previous research hearing that should be

brought to some level of closure. Each issue has an impact on VA funding of research and may ultimately influence the quality and accessibility of the healthcare

available to our veterans.

I must ask the question, if VA were to receive additional funds springing from

control of intellectual property rights or in the form of a reasonable add on for indirect costs on NIH sponsored grants, would the general availability and quality of

healthcare VA-wide improve? If the answer is yes in any meaningful degree, should

we not explore the potential?

Conversely, is veterans’ healthcare suffering, in any way, by VA’s historical reluctance to pursue patents and by its willingness since 1989 to cover indirect costs for

medical and health research associated with NIH grants conducted at VA facilities?

If this is true, what recourse is appropriate?

We have been told about of the outstanding and wonderful discoveries and inventions VA research has yielded. VA should fully earn the rights to its intellectual

progeny—and put those proceeds to use for more robust research programs and better and more accessible healthcare for our veterans.

At the hearing in May, I asked a senior representative from National Institutes

of Health who serves as the Director of the Extramural Grant Program if she would

discuss the appropriate level of an ‘‘add-on’’ for indirect costs associated with grants

to the VA. Dr. Baldwin testified that she, ‘‘. . . would be happy to sit down with

the VA to establish what would be an appropriate level of compensation for additional costs.’’ I look forward to hearing about that meeting’s success in determining

the sufficiency of that level. The bottom line is, if those fair and reasonable costs

lighten the burden on VA’s infrastructure, and that in turn—directly or indirectly—

strengthens the healthcare our veterans receive, I would deem that a worthy goal.
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CHAIRMAN BUYER AND CONGRESSWOMAN CARSON TO NATIONAL ASSOCIATION OF VETERANS’ RESEARCH AND EDUCATION FOUNDATIONS
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